The Push Towards Corporate Guidelines

Abstract

Institutional investors bear an obligation and public expectation to be good stewards of their portfolio companies. Many commentators argue that the investors have failed to do so because they are not incentivized to make adequate investments in corporate governance. However, such criticism only examines institutional investors’ efforts in actively engaging with the governance of their portfolio companies and ignored an important, passive governance tool—corporate guidelines. Those guidelines are published by the investors to articulate their stances on governance issues and justify their voting decisions in annual meetings. Corporate guidelines have become increasingly popular among not only the investors, but also parties who interact with the investors in shaping corporations’ governance regimes, such as the corporations’ managements and other shareholders, proxy advisory firms, and law firms. This paper examines how corporate guidelines are used by those entities and explains why they have been used more frequently. For institutional investors, corporate guidelines serve as the best tool for balancing the investors’ governance-related duties and the need for cost minimization. Creating and using the guidelines is less costly than active engagements, and unlike outsourcing voting decisions to proxy advisory firms, it is still regarded as a valid way to fulfill the investors’ duties as corporate stewards. For managements, aligning governance policies with corporate guidelines signals their commitments to sound governance practices and helps them fend off challenges by activist shareholders. Activist shareholders, on the other hand, also cite corporate guidelines to support their proposals. The rise of corporate guidelines, therefore, can be explained by more investors willing to supply corporate guidelines and more corporations, shareholders, and proxy advisory firms finding the guidelines useful in advancing their own interests.